Difference between Debt and Equity

What is Debt ?

Debt is a type of finance raised by a company from various institutions and individuals to fulfill its long-term goals and objectives. Debt can be characterized by repayment and a fixed interest rate, i.e. the amount raised is repaid to the lender within a fixed duration and fixed interest on the sum is provided to the lender. Debt is considered a liability to the company. Borrowing from banks, loans from various institutions, debentures, loans, etc., are examples of debt.

What is Equity ?

Equity is a type of finance in which a company raises finance from various institutions and individuals by offering ownership of the company to them in the form of shares. There is no such requirement of repayment and fixed interest in this type of source of finance. Equity shareholders are called owners of the company. They are entitled to get dividends from the profits earned by the company.

Note: Debt and Equity are the two major constituents of the external source of finance.

The difference between Debt and Equity are as follows:

Basis	Debt	Equity
Meaning	Debt is a type of source of finance issued with a fixed interest rate and a fixed tenure.	Equity is a type of source of finance issued against ownership of the company and share in profits.
Time Span	Debt capital is issued for a period ranging from 1 to 10 years.	Equity capital is issued comparatively for a longer time horizon.
Returns	Debt capital has a fixed rate of interest, and the entire amount is repayable.	The rate of return in equity capital is not fixed. It depends upon the earnings of the company.
Security	Debt capital can be secured (against an asset) or unsecured.	Equity capital is unsecured since ownership is provided instead of security.
Risk	It is less risky, as interest is provided even in the case of loss and the amount invested can be received back.	It is riskier because if the company does not earn profits, then returns can be as low as zero.
Instruments	The instruments used to raise debt are loans, bonds, debentures, etc.	The instruments used to raise funds are shares.
Status	Debt is considered a lender to the organization.	Equity shareholders are considered owners of the company.
Ownership	In debt, ownership is not sacrificed.	Ownership gets distributed amongst different shareholders according to their shareholdings.
Source	Loans can be taken from banks, and  debentures and bonds can be issued to various institutions and the general public.	Shares can be issued to the general public and various organizations.